IB Business Management HL 2.5.3 Cultural clashes

[Maximum number: 6]

Recruiting a new CEO
A company can spend a large amount of money to recruit a well-known and successful Chief Executive Officer (CEO) from outside the organization. However, recently published research suggests that recruiting externally is not only costly, but it is also risky, disruptive and demotivating.
Two long-term studies of 36 large public limited American companies found the following:
- The companies that promoted CEOs internally performed better than those that recruited externally.
- "Outsider" CEOs (recruited externally) have a significantly higher failure rate than "insider" CEOs (recruited internally). 40 % of "outsider" CEOs stayed for two years or less.
- The average financial reward package for "outsider" CEOs, including salary, bonuses and profit-related incentives, was 65 % higher than for those appointed internally.
- "Outsider" CEOs feel empowered to impose rapid change and to assert their authority on the company, even before they really understand the organizational culture. The arrival of an "outsider" CEO is often quickly followed by the departure of senior managers.
- "Outsider" CEOs are very good at rapid cost-cutting and eliminating unprofitable products/ activities, a skill that is very valuable when a competitive advantage needs to be gained or restored in a competitive environment.
Apple, Dell ${ }^{\mathrm{TM}}$ , Microsoft ${ }^{\circledR}$ , Intel ${ }^{\circledR}$ , McDonalds ${ }^{\circledR}$ and Nike ${ }^{\circledR}$ are successful American companies that appointed CEOs internally between 1998 and 2007.
A comparison of average performance indicators between 1998 and 2007 is shown below:

Table for Question 2.5.3 (HL)—Cultural clashes question 1 — IB Business Management HL

Some critics of the two American studies argue that companies promoting CEOs internally usually have a strong corporate culture and are already efficient and profitable. These critics also argue that the performance indicators in the table do not measure the exact contribution of individual CEOs.
(C) The Times 04 2013]

Examine the usefulness to an organization of rapid change management imposed by a new "outsider" CEO.

Rapid change management imposed on an organization by a new "outsider" CEO can be necessary and hence useful for the following reasons:

During crisis, financial or otherwise, rapid action and decision making is needed. It is often better for a CEO with (possibly) other senior managers to react quickly to make an imposed strategic or tactical decision. A slow, negotiated change management strategy will delay the process of change. Some dire consequences to an organization may occur in the meantime. The newly appointed CEO is likely to have the right industry knowledge, the confidence, shareholders' support and experience to pursue the change.

An imposed and rapid change may also be suitable when the employees are not ready yet in terms of skills and experiences and/or unwilling to get involved in strategic change. Some argue that change management in this situation is better left to the CEO with his/her experience/skills. A short process that leads to a rapid change is less costly.

The structure, culture and nature of the organization (military, dangerous product, confidential information, nuclear reactor) also affect the nature of change management.

However, a rapid and imposed change is likely to create resentment and resistance if the employees do not perceive the situation as some sort of crisis and/or if they believe that they have the skills, experience and willingness to be consulted and believe they should be allowed to participate in the change management process.

As stated in the stimulus, the new "outsider" CEO may be over confident regarding the support he/she might have as well as inside knowledge and experience. Not being familiar with the culture of an organization especially if the employees are willing and able to participate in the required change management could lead to industrial unrest / dispute / de-motivation and even the loss of skilled employees. Moreover, rapid change will not allow time for training and development, communication and so on.

A non negotiated/imposed change can create fear and seriously affect the motivation of the employees who may feel unappreciated or unimportant. A slow change and possibly a negotiated one is likely to be more accepted and more easily implemented. For these reasons it can be argued that negotiated and possibly incremental change management should be more useful.

Accept any other relevant examination.
It is not expected that candidates will include all of the above points in their answer.
A balanced response is one that covers at least two issues for and at least two issues against.

For one relevant issue that is one-sided, with no examination, award up to a maximum of [3 marks]. For one relevant issue that is balanced, with examination, award up to a maximum of [4 marks].

Marks should be allocated according to the markbands on page 3.

IB Business Management HL 2.5.3 Cultural clashes Question Bank

Exam points

2.5.3 (HL)—Cultural clashes question 1